The Special Relationship and the Insurance Producer

June 2012
Published by the CPCU Society
The Special Relationship and the Insurance
Producer
by Stanley L. Lipshultz, JD, CPCU
Introduction
The special relationship advanced in insurance agent/broker lawsuits has been
recognized by courts for a long time, although lately, allegations of the existence of the
special relationship have become ubiquitous, finding their way into almost every claim
against the insurance agent or broker.1 When properly used, the special relationship is a
powerful tool in the hands of the skilled policyholder’s attorney.
Plaintiffs use the special relationship to support a general duty to provide advice to a
policyholder or as a separate cause of action alleging an additional legal threshold duty
to provide some type of advice to the policyholder. Defendants usually counter that
the special relationship simply does not exist based on the facts or, alternatively, that
it places on the producer an otherwise-egregious burden of furnishing advice to clients
regarding the selection of “adequate” limits or the purchase of arcane insurance coverages
that might be available or somehow applicable to the risk and its exposures.2
Special Relationship Illustrative Cases
Bruner v. League Insurance Company involved an agent’s alleged affirmative duty to
give advice as to the adequacy of coverage. The plaintiffs, Thomas and Lora Bruner,
received notice from their automobile insurer that uninsured motorist coverage had
been deleted from their policy but remained available upon request. Neither plaintiff
contacted their agency concerning the deleted coverage. After Lora Bruner was seriously
injured by a hit-and-run driver, she attempted to retroactively reinstate the uninsured
motorist coverage through the use of the special relationship by alleging that the
defendant agency had a duty to advise plaintiffs about the adequacy of their coverage.3
The Court of Appeals of Michigan found that no question of fact existed concerning the
special relationship, as plaintiffs had neither contacted the agency following the notice of
the deletion of the uninsured motorist coverage nor inquired as to the nature and cost or
whether to purchase the coverage.4
Rawlings v. Fruhwirth also involved an alleged failure of the agent to recommend
coverage in an automobile policy. Plaintiff’s son died as a result of injuries sustained in
an automobile accident in July 1985. After settling a wrongful death suit with Charles
Sweeney, the negligent driver, Rawlings took an assignment of Sweeney’s rights and sued
Sweeney’s agents and insurer.5 Using agents from two separate agencies, the insured,
Sweeney, procured an automobile liability policy from one (Fruhwirth) and an umbrella
liability policy from the second (Larson) but did not request Larson to procure additional
liability insurance to fill the gap in limits between the existing liability policy and the
umbrella.6 The court rejected Sweeney’s argument that a special relationship existed
between Larson and Sweeney imposing on Larson a duty to procure additional insurance
JUNE 2012
1
Stanley L. Lipshultz,
JD, CPCU, is a consultant
and an expert witness in
insurance matters. He
received his JD degree in 1970
from American University
Washington College of Law
and earned the CPCU
designation in 1989. As
a practicing attorney, he
defended insurance agents,
brokers, and their E&O
insurers for more than
twenty-five years as defense
counsel before retiring from
the active practice of law in
1999. He has consulted in
numerous matters, including
agent and broker standard of
care, insurance coverage, and
bad faith.
The Special Relationship and the Insurance Producer
not expressly requested. Even though Sweeney discussed the gap with Larson and Larson
recommended that Sweeney obtain insurance to cover the gap, no request was made
to Larson to procure this insurance.7 Citing Bruner, supra, the Rawlings court agreed
that the special relationship required more than the standard policyholder-insurer
relationship triggering the duty to advise the policyholder about insurance coverage;
and, that there must be a long-standing relationship and some kind of communication
on a question of coverage with the insured relying on the expertise of the agent to the
insured’s detriment.8
The Court of Appeals of Arizona took a slightly different approach to the question
of whether an agent has a duty to recommend or give advice as to the need for any
specific insurance coverage. In the case of Southwest Auto Painting and Body Repair,
Inc. v. Binsfeld, the court reversed and remanded for further proceedings the granting
of a motion for summary judgment in favor of the agent.9 The trial court had granted
Binsfeld’s motion holding as a matter of law that an agent has no duty to recommend
or offer advice as to the need for additional coverage. Robert Lanzon, the owner of
Southwest, decided to use Binsfeld’s insurance agency, envisaging body shop referrals
from the agency. Lanzon alleged that Binsfeld recommended certain insurance coverages
and that Lanzon relied on Binsfeld and the agency for advice on the procurement as
well as the appropriate coverage for the business.10 Binsfeld did not discuss or mention
employee dishonesty coverage, and Lanzon was unaware such coverage existed. Lanzon
did not seek any advice concerning his insurance coverage from 1986 to 1989. A
bookkeeper hired by Lanzon in September 1986 embezzled $150,000 over the three-year
period in question. A claim presented by Southwest was denied by the insurer due to the
lack of coverage. Southwest sued its agents, alleging that the failure to offer or advise
of the need for employee dishonesty coverage “fell below the standard of care expected
of an insurance agent and broker who obtain insurance coverage for a business.” 11 The
agency responded that Arizona law does not recognize an additional duty to give advice
unless the agent has a special relationship with the insured and that no such relationship
existed. Southwest provided expert testimony that, based on those individuals who had
check-signing authority, the standard of care required the agent to give advice about
the availability of applicable types of coverage, particularly fidelity coverage. The trial
court found that the agent’s general duty did not impose an affirmative duty to offer or
recommend specific insurance coverage and that there was no special relationship that
might have imposed such a duty.12 In its finding, the trial court completely rejected
Southwest’s expert’s opinion. In reaching its decision, the appellate court held that an
agent owes a duty to exercise reasonable care, skill, and diligence in procuring insurance
coverage, even absent a special relationship, concluding that the trial court erred in
finding no duty as a matter of law. The court discussed the distinction between legal
duty and standard of care.13 Relying on deposition testimony of Southwest’s expert, the
court concluded that the testimony raised a question of fact as to whether the standard
of care required Binsfeld to advise as to relevant types of coverage available.
In Trupiano v. Cincinnati Insurance Company, the Court of Appeals of Indiana,
applying Michigan law and also relying on Bruner, upheld a grant of summary judgment
in favor of the agent, Alkema; his agency, SZW; and the Cincinnati Insurance Company
against Trupiano. SZW and Alkema had a continuous fourteen-year relationship with
Trupiano and his company, OSC, during which time Alkema “advised OSC concerning
various types of business coverage, including worker’s compensation, comprehensive
general liability, blanket building and contents insurance, loss of business income, and
fleet insurance.” 14 Trupiano met with Alkema at least once a year to discuss insurance
matters,15 and SZW sent an annual letter outlining OSC’s entire insurance program,
including the adequacy of the recommended coverages as well as those coverages that
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Abstract
The special relationship
doctrine can create an
overwhelming burden for
the unsuspecting insurance
agent or broker by imposing
a duty to provide advice to
a policyholder concerning all
possible coverages and in some
instances a responsibility to
give advice as to what limits
to purchase and whether such
limits are “adequate.” This
article explores the nuances
of the special relationship and
provides a template for the
producer, the policyholder,
and their respective attorneys
to follow by illustrating the
circumstances that give rise
to the special relationship
between the producer and
the policyholder/insured.
Navigating the special
relationship minefield is not an
easy task, especially because
actions the producer innocently
perceives as being “value
added” may create a legal duty
where none was contemplated.
Knowing the elements of the
special relationship will allow
the producer to decide whether
embracing it—as opposed
to avoiding it—will enhance
the producer’s connection
with the client by using the
special relationship to inspire
a client to focus on aspects
of the insurance procurement
transaction that do not involve
the bottom line. This article
makes it clear that the special
relationship is not premised
on such relationship factors as
longevity, social interaction,
reliance for non-property
and casualty advice, or even
providing unsolicited advice
under most circumstances.
The Special Relationship and the Insurance Producer
Alkema felt were deficient. In 1985, Trupiano purchased an automobile liability policy
through Alkema with Cincinnati to insure his business fleet of seven automobiles. In
December 1989, Trupiano and his wife were injured in an automobile accident and
settled with the negligent driver for policy limits of $100,000. Because Trupiano’s
policy contained $40,000 uninsured/underinsured limits, they were not entitled to
any benefits under their underinsured motorist coverage. The Trupianos brought an
action against Alkema, SZW, and Cincinnati, alleging that the underinsured motorist
limit was “wholly inadequate.” 16 In appealing from the trial court’s grant of summary
judgment, Trupiano argued that there was a special relationship between Alkema/SZW
and OSC/Trupiano “which would create a duty to advise about the adequacy of the
insurance coverage.” 17 The court found that the facts were insufficient to overcome
Trupiano’s general allegations that “Alkema and SZW held themselves out as insurance
professionals and either knew or should have known that [Trupiano] and OSC were
relying on them for appropriate advice on the types and amounts of business auto
insurance coverage they should have.” 18 The facts did not support any interaction
between the parties on the question of uninsured/underinsured motorist coverage.
In Murphy v. Kuhn,19 the Court of Appeals of New York rejected plaintiffs Murphy
and Webster Golf Course Inc.’s argument that Kuhn was required to give advice as to
possible additional insurance coverage needs based on the special relationship. Kuhn
began providing property and casualty insurance to Murphy’s business in 1973 and in
1977 began providing homeowners and automobile insurance to Murphy. A personal
auto policy was placed for Murphy in 1990 but later in the year was in jeopardy of
cancellation due to the driving records of his children. Murphy transferred the car his
son used (although titled and registered in Murphy’s name) to the business’s commercial
auto policy. The liability limits on this policy remained unchanged from 1984 through
the date of an accident in 1991 involving Murphy’s son. The 1991 accident involved
a death and serious injuries. Murphy did not request higher liability limits for his
personal and family automobile policies at any time prior to the accident. Murphy
paid an additional $200,000 over policy limits to settle the injury claims and then sued
the agents for reimbursement. The thrust of Murphy’s argument was “that a special
relationship developed from a long, continuing course of business between plaintiffs
and defendant insurance agent, generating special reliance and an affirmative duty to
advise with regard to appropriate or additional coverage.” 20 The court concluded that
the plaintiffs had not established a factual basis for the special relationship. Stating that
there is a “high level” necessary to recognize the special relationship threshold, “… the
record . . . presents only the standard consumer-agent placement relationship, albeit
over an extended period of time.” 21
In the case of Peter v. Schumacher Enterprises, Inc., the Alaska Supreme Court
addressed the question of whether insurance agents have a common law duty to give
advice to their customers about their insurance coverage, concluding that such a duty
exists but is dependent upon the existence of the “special relationship.” The seminal
issue revolved around the agent’s alleged failure to advise and recommend to the insured
that higher UM/UIM limits could and should be purchased after the insured asked for
“full coverage.” Peter alleged that Last Frontier, the agency, made no inquiries into
the financial status, family needs, asset value, or importance of UM/UIM coverage in
procuring a policy of automobile insurance. The agent countered that various limits
were discussed and Peter was provided with written information describing levels of
available UM/UIM limits. The insured, Donita Peter, also signed a document stating
that she “unequivocally selected” the UM/UIM limits found in the policy. As a result
of its conclusion that Donita Peter’s affidavit raised genuine issues of material fact
concerning the existence of a special relationship, the court reviewed a number of cases,
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The Special Relationship and the Insurance Producer
including Murphy. The court left the adequacy of coverage limits query squarely with the
insured, finding that such is a matter of opinion. The court also reasoned that:
. . . an undesirable consequence of imposing such a duty would be that agents would
defensively tend to advise their customers to buy the highest, most comprehensive and
expensive coverages rather than the more modest packages that most people of similar
means would find suitable. This could result in a mis-allocation of personal resources of
individual insureds.22
The court remanded the matter to the trier of fact to determine whether the facts
supported a finding of a special relationship. Should the special relationship be found to
exist, then the next step would be to determine whether Last Frontier’s advice, whether
implied or obvious, was reasonable or whether higher UM/UIM limits should have been
recommended.23
In Zaremba Equipment, Inc. v. Harco National Insurance Company, Harco appealed
from a jury verdict of $2,353,778 a portion of which included a deficiency in
replacement cost limits for a building and contents of $1,192,000. Zaremba had been
insured for seventeen consecutive years with Harco. Plaintiff alleged that at some
unspecified time before a total loss of its primary business premises in 2003, Jimmy
Zaremba, the insured’s business manager, had informed Harco’s agent, Patrick Musall,
that “it wanted to be fully insured so it could rebuild and replace its property in the
event of a complete loss.” 24 Plaintiff further alleged that Musall indicated Harco
could issue a replacement cost policy adequate to rebuild plaintiff’s building. From
approximately 1998 through the 2002 renewal of the Harco policy, Musall met with
Zaremba at least twice a year to discuss insurance needs, available coverages, and
potential policy limits. Beforeaccepting Harco’s 2002–2003 renewal proposal, Zaremba
showed Musall a proposal from a competing insurer that included, among other things,
building coverage limits in the amount of $450,000 with “Guaranteed Replacement
Cost.” 25 “Musall conceded that Jimmy had asked him to ‘meet or beat’ the [other]
proposal and expressed a desire ‘to be fully insured.” 26 Musall used a Marshall & Swift
software program to prepare a cost estimate for the reconstruction of the building,
which was ultimately insured for $525,000. Musall also conceded that he made specific
recommendations as a result of Zaremba’s request to be “fully insured.”27 Although the
policy covering the loss had not been received prior to the fire, Zaremba admitted that
he had not read any of the previous policies. On appeal, Harco challenged the jury
verdict on a number of grounds, including the negligence verdict.28 The defendant
launched a multi-pronged attack on the negligence verdict, beginning with the insured’s
failure to read the policy as well as the insurance quotations provided to the plaintiff.
Defendant argued that had the plaintiff read the earlier policy or the quotation, it would
have been obvious that “full replacement value” was clearly not included in the policy,
constituting not only comparative negligence but also the proximate cause of plaintiff’s
loss. Reciting the general rule that an agent “owes no duty to advise a potential insured
about any coverage” and the exceptions to the rule,29 the court, relying on Harts v.
Farmers Insurance Exchange30 agreed that the special relationship creates a duty to give
advice in certain circumstances. The jury in the underlying action found that a special
relationship existed. The appellate court rejected Zaremba’s argument that the finding
of a special relationship eliminated the claim of comparative fault concomitant with the
duty on the part of the insured to read its insurance documents.31
. . . we view as simply illogical the suggestion that the agent’s decision to undertake
additional responsibilities on behalf of an insured immunizes the insured from the
consequences of its own negligence. The negligence of one party does not eliminate the
legal requirement that an opposing party use ordinary care.32
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The Special Relationship and the Insurance Producer
The court reversed the judgment in favor of the plaintiff on the negligence and other
claims and remanded the matter for a new trial.
The Court of Appeals of Washington addressed the question of adequacy of limits of a
homeowners policy in the matter of McClammy v. Cole. Plaintiffs, Richard and Mary Lou
McClammy, appealed from a dismissal of their claims based upon the special relationship,
against Michael Cole and State Farm Fire and Casualty Company. The Court affirmed
the lower court’s decision, finding that, absent a special relationship, an insurance agent
has no obligation to recommend limits higher than those chosen by the policyholder.33
When plaintiffs purchased their home in 1995 for $248,000, Cole provided three quotes
with limits from $190,000 to $225,000. The McClammys chose a $200,000 replacement
cost policy. Over several years, improvements were made to the property, although this
was not made known to Cole until a meeting in May 2004 with Mr. McClammy. The
primary purpose of the meeting was to discuss the increase in premiums and how to
reduce them, although the improvements were discussed in general. At that time, the
home was insured for $275,200. After the meeting, at McClammy’s request, Cole sent
an e-mail providing information on previous coverage rates and premiums and further
indicated that based on the information provided by Mr. McClammy, the limits could be
reduced to $240,200 “and still stay within an estimated 100% to value.” 34 The home was
completely destroyed by a fire on April 5, 2005. Based on contractors’ estimates, the cost
to rebuild the home exceeded the policy limits by $213,000. In seeking the excess over
policy limits, the McClammys relied solely on the special relationship. The court stated:
A special relationship exists if (1) the agent holds himself out as an insurance specialist
and receives additional compensation for consulting and advice, or (2) there is a longstanding relationship, some type of interaction on the question of coverage, and the
insured relied on the agent’s expertise to the insured’s detriment.35
Although the court agreed that there was a long-standing relationship and that there
was some sort of interaction on the question of coverage, the facts did not support a
finding that the policyholders ever consulted with Cole about the adequacy of coverage
and further that Cole did not provide any advice in that regard. Without this type of
interaction, the special relationship could not be supported.36
Defining the Special Relationship—The Policyholder and the
Producer
Almost universally, an insurance agent’s legal duty is to follow his or her client’s
instructions and to obtain the best insurance available at the most commercially
reasonable price and terms using reasonable skill and ordinary diligence. There is
no additional “legal” duty to provide unsolicited advice: “. . . it is well settled that
agents have no continuing duty to advise, guide, or direct a client to obtain additional
coverage.” 37 Under certain circumstances, however, a special relationship can be created
between the insured and the insurance producer, thereby altering the producer’s legal
duty by adding a legal duty to provide advice to the insured.38
Before discussing the criteria necessary to establish the special relationship, it
is important to understand what the special relationship is and what it is not. The
special relationship is not a basis for post-loss underwriting. Assertions of the special
relationship usually include allegations (i) that the producer should have advised the
insured to purchase certain specific coverage or adequate limits; (ii) that if the insured
had been so advised, the coverage and/or limits would have been purchased; and (iii)
that if the coverage had been purchased and available,39 the result would have been
that an underinsured or disputed claim would have been paid by the insurer. However,
in situations in which the facts support the existence of the special relationship, any
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The Special Relationship and the Insurance Producer
claim against a producer is fortified because of the additional legal duty imposed on the
producer. The special relationship, once established, can eliminate the need for proof of
a violation of the standard of care by the producer.40 Consequently, assertions of a special
relationship are often added to a complaint against a producer even without any factual
underpinning as a tactic to gain a favorable settlement.
When considering whether to bring an action against an insurance producer based on
the special relationship, the practitioner should carefully evaluate the use of the “expert”
description as a substitute for actual facts supporting the special relationship. That the
producer is an “expert” should have a logical nexus to the insurance being procured;
otherwise, the court may easily find only the typical policyholder-producer relationship.
For example, an insurance producer who procures a package policy for a restaurant,
a dry cleaner, an office building, or other common types of businesses ordinarily does
not need special expertise to procure such insurance and is ordinarily not an “expert,”
despite allegations to the contrary. The “expert” appellation is more appropriate in areas
of specialized coverages not dealt with on a regular basis by most insurance producers,
such as motor truck cargo, ocean marine, or aviation exposures.41 As the reviewed cases
suggest, in order to establish the special relationship, more than the typical policyholderinsurance agent association must be demonstrated.
The Special Relationship, Coverages, and Policy Limits
The decisions uniformly distinguish between advice as to coverages and
recommendation as to limits. For example, the Maryland Court of Special Appeals
dealt with the subject of the special relationship in Sadler vs. The Loomis Company,
139 Md.App. 374, 776 A.2d 25, (2001). Evelyn Sadler had been a client of the Murray
Agency42 through her family business as well as personally for over fifty years, purchasing
both homeowners and automobile insurance. Until The Loomis Company purchased
the Murray Agency in 1987, there were regular meetings with a Murray producer who
delivered the policies. This practice stopped with Loomis, contact being limited to
times when she had a question concerning her insurance, and then only by phone or
letter. On May 13, 1996, Sadler had an at-fault accident with a motorcyclist, Timothy
Prophet, resulting in amputation of one of the motorcyclist’s legs. At the time of the
occurrence, Sadler had automobile liability limits of $100,000.43 In 1999, Sadler settled
Prophet’s claim for $1 million, which included the $100,000 from her automobile insurer.
Sadler then sued Loomis, claiming it was negligent because it was aware of her financial
position and “failed to provide her with periodic quotes as to the cost of additional
protection, or sufficient information to enable her to make an informed decision as to the
appropriate level of liability coverage.”44 The Court held “that, in the absence of a special
relationship, an insurance agent or broker has no affirmative, legally cognizable tort duty
to provide unsolicited advice to an insured regarding the adequacy of liability coverage.” 45
The court further opined that:
A “special relationship” within the insurance industry is an important concept. A special
relationship in the context of insurance requires more than the ordinary insurer-insured
relationship. It may be shown when an insurance agent or broker holds himself or herself
out as a highly skilled insurance expert, and the insured relies to his detriment on that
expertise. A special relationship may also be demonstrated by a long-term relationship of
confidence, in which the agent or broker assumes the duty to render advice, or has been
asked by the insured to provide advice, and the adviser is compensated accordingly,
above and beyond the premiums customarily earned. (Citations omitted)46
Citing with approval from Parker v. State Farm Mut. Auto. Ins. Co., 630 N.E.2d 567,
569-570 (Ind.Ct.App. 1994), the Court continued:
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The Special Relationship and the Insurance Producer
[It] is the nature of the relationship, and not merely the number of years associated
therewith, that triggers the duty to advise. Some of the factors relevant to developing
entrustment between the insured and the insurer include: exercising broad discretion
to service the insured’s needs; counseling the insured concerning specialized insurance
coverage; holding oneself out as a highly-skilled insurance expert, coupled with the
insured’s reliance upon the expertise; and receiving compensation, above the customary
premium paid, for expert advice provided. (Internal case citations omitted)47
What can be gleaned from the case law is that the producer has no legal duty to give
advice to the insured unless special circumstances or a special relationship exists. In
discussing the duty to advise of possible additional coverage needs, New York’s highest
court, in the case of Murphy v. Kuhn, pithily stated: “[Insurance agents] are not personal
financial counselors and risk managers, approaching guarantor status.” 48
The general rule is well stated in a 1997 California appellate decision, Fitzpatrick v.
Hayes:49
[A]s a general proposition, an insurance agent does not have a duty to volunteer to an
insured that the latter should procure additional or different insurance coverage. . . .
The rule changes, however, when­—but only when—one of the following three things
happens: (a) the agent misrepresents the nature, extent or scope of the coverage being
offered or provided, . . . (b) there is a request or inquiry by the insured for a particular
type or extent of coverage, . . . or (c) the producer assumes an additional duty by either
express agreement or by “holding himself out” as having expertise in a given field of
insurance being sought by the insured.
The producer is protected by the body of laws discussed above, which set forth the
seminal duties of a producer and acquit the producer of responsibility for rendering
unsolicited advice to a client. The responsibility for decisions concerning the selection
of insurance coverages offered by the producer and the selection of limits rests solely
with the insured. In most jurisdictions, it is the responsibility of the customer to read the
policy to determine, among other things, that the coverages and limits are those that
have been requested.
The analysis used by the court in Southwest Auto Painting and Body Repair, supra,
provides the practitioner with a means to sidestep the difficulty in establishing the
special relationship. By framing the producer’s failure to provide advice as a standard of
care issue, there would be no need to rely on the special relationship: the finder of fact
could find that a failure to provide advice was a clear-cut violation of the standard of
care not dependent upon the special relationship.
Risk Management and the Special Relationship
Although not explicitly addressed in the above reviewed cases, and largely overlooked,
when an insurance producer purports to act as a risk manager, either demonstrably or
by default, a special relationship can be created.50 However, there is a clear delineation
between a risk analysis performed by an insurance producer and a risk management
assessment performed by a risk manager. The approach used by both the producer and
risk manager is deceptively similar to what is used by the consumer, but the methodology
used, analysis performed, and results offered by the risk manager are considerably more
extensive, and the outcome can be distinctly different. In order to understand the scope
of the risk manager issue, a definition of risk management is instructive:
Risk Management is the systematic, problem-solving process used to identify and treat
the pure loss exposures of an organization or individual; it has six steps: identify loss
exposures, analyze or measure loss exposures, consider the risk treatment alternatives,
select the best combination of risk treatment alternatives, implement the decision and
monitor the program.51
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The Special Relationship and the Insurance Producer
Under most circumstances, an insurance producer is not a genuine risk manager
unless that individual has received training and/or has been certified as a risk manager
and the agent has unmistakably agreed to act in that capacity. A risk manager is an
individual who, by education and/or training, has: (a) a background in insurance; (b) an
ability to identify all patent, as well as latent, exposures; (c) knowledge of the available
various risk transfer methods and when to recommend each; and (d) an operating
knowledge of all insurance coverages available to the sector in which the risk manager is
employed. There are, however, marked differences between the insurance producer’s and
the risk manager’s guidance for an insured. Insurance is the most commonly accepted
form of risk transfer and is the exclusive method employed by the insurance producer on
behalf of a client. A risk manager, on the other hand, has a number of risk transfer or
risk treatment methods not usually offered by the insurance producer: (1) loss control,
(2) avoidance, (3) retention, (4) noninsurance transfer (i.e., indemnity, hold-harmless
agreements), and (5) insurance. In other words, a risk manager tries to avoid using
insurance, the goal being to reduce the cost of risk, not to sell insurance. Compare these
tasks with the goal of an insurance producer whose sole function is to protect the client
through the exclusive use of insurance.
Incongruous as it may seem, even though the insured may believe that the producer
is functioning as a risk manager, unless agreed to in advance, the producer assumes no
risk management duties in the legal sense. Whether the producer is considered a risk
manager depends, at least in part, upon how the consumer/insured perceives the role of
the producer and whether this perception is expressed to the producer by the insured
and/or by the producer to the insured. Full disclosure by the insured or prospective
insured of the parameters of his or her reliance is a prerequisite in those instances in
which the insured claims that the producer agreed to act as a risk manager.
According to Madelyn Flanagan of the Independent Insurance Agents of America,
“Risk analysis is an everyday part of what [independent agents] do. It has always been a
part of what they do on behalf of a commercial client. . . .” 52
Historically, the client perceives that the producer is acting as a risk manager. Most
clients equate the assistance provided by an insurance producer as “risk management”
services and do not know the difference. In other words, the producer acts as an ad hoc
risk manager, and the insured forms the opinion that risk management services are being
provided. Neither acknowledges that risk management is or is not occurring. External
pressures, such as insurance market conditions, competition, mergers of companies with
subsequent reduction of markets, and mergers of agencies have forced the producer
to imitate a risk manager in many commercial and, to a lesser extent, personal lines
account situations. In these instances, the application of the factual circumstances to
the legal duty will be determinative of the producer’s liability.
The Special Relationship in Federal Courts
It will be problematic for federal plaintiffs to effectively plead the special relationship
as well as to avoid a successful 12(b)(6) motion to dismiss. Unlike most state plaintiffs,
federal plaintiffs will have a difficult time overcoming a motion to dismiss the special
relationship allegations because of the holdings in Bell Atlantic Corp. v. Twombly, 129
S.Ct. 1937, 173 L.Ed2d 868 (2007) and Ashcroft v. Iqbal, 550 U.S. 554, 127 S.Ct. 1955,
167 L.Ed2d 870 (2009).53 Practitioners will be required to provide facts that support the
allegations of a special relationship: allegations such as that the producer held himself
or herself out as an “expert,” that the insured depended on the producer and his/her
expertise, that the producer was previously an insurance underwriter, that the producer
recommended that the insured purchase certain coverages but failed to suggest others,
and/or that there is a long-standing relationship between the agent and the insured are
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simply not sufficient based on the case law in most jurisdictions to sustain a claim based
on the special relationship.
Real-world examples: Below are characteristic allegations from a state and a federal
lawsuit that purport to represent a colorable claim that a special relationship existed
between the insurance producer and the client.
In the first example, filed in state court, the client/policyholder is the owner of a
restaurant, the building housing the restaurant, and substantial business personal property:
Through Defendants’ actions and interactions with the Plaintiffs, Defendants cultivated
and created a special relationship with the Plaintiffs, such that Plaintiffs reasonably
relied upon the advice and recommendations of the Defendants to select and produce
an appropriate type and amount of insurance coverage for their business and property.
Defendants undertook to counsel Plaintiffs on their specialized insurance coverage
needs, and Defendants were given broad discretion to procure insurance that would
protect [Plaintiffs].
The policyholder started in the restaurant business in 2002, when he assumed a lease
and purchased an ongoing restaurant business. In 2005, the policyholder purchased
a building and moved the restaurant to this new location. From 2002 until the end
of 2007, the policyholder used the services of a producer referred by the individual
from whom the insured purchased the business. At the end of 2007, the policyholder
changed producers to the defendant. In early 2009, the building housing the restaurant
was substantially damaged by fire, and the business personal property was destroyed.
According to the insured and his public adjuster, the building and business personal
property were significantly underinsured.54
The insured restaurant owner testified during deposition that he had never read any
insurance policy provided to him by either the previous producer or the defendant. In
arriving at the values for the building and business personal property, the defendant
producer, with the approval of the insured, used the limits of the expiring policy as
baseline limits of the policy he procured for the plaintiff. The producer asserted that
he reviewed the policy, including limits, with the insured both before the policy was
procured as well as when the policy was delivered and at the subsequent renewal. When
pressed during his deposition for particulars that might support a special relationship,
the policyholder was unable to identify a single fact to support a special relationship.
Allegations were also made in the complaint that payments were provided to the
producer in addition to commissions, allegations that turned out to be fabricated and
that were ultimately withdrawn. Furthermore, the policyholder stated that he did not
give the producer the power to make any decisions with respect to insurance.
By the plaintiff simply suggesting in his complaint that a “special relationship was
cultivated,” a dismissal on the pleadings may have been avoided, but these threadbare
allegations cannot ultimately sustain the evidentiary burden imposed on the plaintiff to
prove a genuine special relationship. The case settled prior to trial.
A second example involves a federal district court multimillion-dollar lawsuit filed
against an insurance producer by a religious order55 for underinsured losses suffered by its
religious school in New Orleans caused by Hurricane Katrina. Both the order and the
school were plaintiffs:
• Defendant represents that it specializes in insurance coverage for religious, charitable
and academic institutions. Defendant represents that it understands “the unique
challenges of managing the risks that the academic world addresses every day” and
purports to “deliver innovative solutions to meet those demands.” Defendant also
represents that it specializes “in providing long-term, stabIe, and affordable solutions of
risk management and insurance programs” for religious and charitable organizations.
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• For over fifty years, Defendant has been the insurance broker, consultant and advisor
for the Plaintiffs. At all times relevant hereto, Defendant has held itself out and
represented to the Plaintiffs and The School as having special expertise in the insurance
requirements of religious and academic institutions, particularly Catholic institutions.
• At all times relevant hereto, Defendant has understood, acknowledged, and
represented that it had a special relationship with [both] The School and the Plaintiff
whereby Defendant had a professional and contractual obligation to review coverage
for Plaintiff and The School, evaluate that coverage and recommend any necessary or
useful changes in policy limits, scope of coverage, or type of coverage, all in order to
make sure that The School and the Plaintiff had the necessary and requisite insurance
coverage to protect their interests.
• Defendant intended and knew that The School and the Plaintiffs relied on Defendant’s
expertise and trusted that Defendant would regularly review their insurance coverage
and make all necessary and expected recommendations and would, due to their special
relationship, do nothing to harm The School and the Plaintiff.
• [NEGLIGENCE AGAINST AGENT] Professional insurance brokers, advisors, and
consultants such as Defendant are considered fiduciaries and are, therefore, held to a
standard of care higher than the ordinary standard of care. Defendant, as an insurance
broker and/or consultant with a long-term, special relationship with The School and
the Plaintiffs, was obligated to exercise fiduciary duties of good faith, reasonable skill
and diligence in dealing with The School and the Plaintiff.
The producer in this lawsuit had not procured business interruption coverage for the
religious school, and the purported business income/tuition loss was alleged to have been
in excess of $2 million. A representative of the producer testified at his deposition that
business interruption coverage and limits had been discussed several times and that the
Order was aware of such coverage and had rejected it on several occasions. The Order
disputed these statements. An interesting facet of the claimed damages for the business
income loss was that many of the students who had been relocated to other areas of
Louisiana as well as other states did not return to New Orleans, thus decreasing the
available student base with a subsequent continued loss of tuition income. The school
was able to continue to function after a few weeks post-Katrina by first relocating to
a facility in an undamaged area outside of New Orleans and by then reopening once
repairs had been accomplished. A separate issue concerned the scope of the business
interruption claim and whether this was appropriate to factor in to the overall claim.
To avoid these issues, considerable emphasis was placed on the special relationship by
the plaintiff in order to circumvent the myriad of factual inadequacies in its case. In
its answers to interrogatories, the plaintiff Order, in support of its special relationship
allegations, referred to the producer’s website, which touted the producer’s extensive
knowledge and expertise in insuring religious institutions and religious schools, and the
use of the term “expert.” The latter might have been of some aid to the plaintiff had any
individual within the Order been aware of or accessed the website.
Plaintiff alleged that the agent should have advised the plaintiff of the available time
element coverage and recommended that it be purchased based on the existence of the
special relationship, consequently rendering the factual disputes moot. Plaintiff held
its ground on the special relationship issue through the paper discovery phase, but it
unraveled during depositions of the priests who were responsible for procuring insurance
through the producer.
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Using the guidance set out in Sadler, supra, defense counsel was able to highlight the
abject failure of a factual predicate necessary to establish the special relationship. In order
to support a finding that a special relationship existed, the designated representative of
the Order during his deposition testified to four examples: the producer had procured
flood insurance post-Katrina, had periodically reviewed with the Order the values it
had set for its various properties, had addressed the Order’s concern over sexual abuse
coverage and limits, and had raised and discussed terrorism coverage. The deponent
could not point to a single instance when the defendant was made aware of the potential
existence of the special relationship. Prior to defendant’s counsel filing several dispositive
motions, including one based on Iqbal, supra, the parties settled the matter.
Conclusion
Care should be used by the practitioner before building an entire case against an
insurance agent on the special relationship or when deciding to add allegations that
a special relationship supports claims of breach of contract, negligence, or the other
available tort and contract remedies. Using the special relationship as the only basis
for a lawsuit against a producer is a daunting challenge but in some situations might
be a worthwhile exercise. State courts, as opposed to federal courts, are generally
more inclined to allow a case to proceed beyond the motions stage even when there
is slight verifiable substance to the claim of a special relationship. However, once past
the motions stage, the lawsuit achieves a basis on which settlement must eventually
be considered by defense counsel. Nonetheless, a settlement in an E&O case is more
difficult to achieve than in a conventional negligence case: before any E&O case can
be settled, the terms and conditions of the producer’s claims made policy—which often
include a loss or combined loss/litigation deductible that must be paid by the producer—
the producer’s control over any potential settlement, and the applicability of a hammer
clause and the company’s willingness to use it must be addressed. Relying on the special
relationship where none exists offers only an illusory weapon to a plaintiff’s attorney
that, when wielded, creates an additional workload for both parties and that, without
a strong factual base, can lead to an embarrassing situation, either during deposition,
during motions hearings, or at trial.
Endnotes
(1)Since a majority of states have passed or employed the National Association of Insurance
Commissioners (NAIC) Producers Licensing Model Act, which defines insurance agents and brokers
collectively as an insurance producer, for the purposes of this article, the terms “agent” and “broker”
are used interchangeably along with the term “producer.”
(2)See Bruner v. League Insurance Company, 164 Mich. App. 28, 416 N.W.2d 318 (1987), Rawlings v.
Fruhwith, 455 N.W.2d 574 (N.D., 1990), Southwest Auto Painting and Body Repair, Inc. v. Binsfeld, 183
Ariz. 444, 904 P.2d 1268, (Ariz. App. Div.1, 1995), Trupiano v. Cincinnati Insurance Company, 654
N.E.2d 886 (Ind. App. 1995), Murphy v. Kuhn, 660 N.Y.S. 2d 371, 90 N.Y.2d 266, 682 N.E.2d 972 (1997),
Harts v. Farmers Ins. Exchange, 461 Mich.1, 597 N.W.2d 47(1999), Peter v. Schumacher Enterprises, Inc.,
2001 Alaska 160 (2001), Sadler vs. The Loomis Company, 139 Md.App. 374, 776 A.2d 25, 1 (2001),
Sintros v. Hamon, 810 A.2d 553 (N.H., 2002), Zaremba Equip. v. Harco National Insurance Company,
280 Mich. App.16, 761 N.W.2d 151, (2008), Axis Construction Corp. v. O’Brien Agency, Inc., 2009 NY Slip
Op 32491 (N.Y. Sup. Ct.10/21/2009), (N.Y. Sup. Ct., 2009), McClammy v. Cole, 243 P.3d 392, 158 Wash.
App.769 (Wash.App 2010). These cases are representative of the law in various jurisdictions but are
not intended as an exhaustive collection.
(3)
Bruner at p. 319.
(4) Id. at 321.
(5)Rawlings at 575. The allegations included failure to procure requested insurance, failure to protect
against gaps in coverage, and negligent misrepresentation as to the availability of insurance.
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The Special Relationship and the Insurance Producer
(6)
Id.
(7) Id. at 579.
(8)
Id. 578.
(9)
Southwest Auto Painting at 1272.
(10) Id. at 1269.
(11) Id. at 1270.
(12) Id.
(13)Id. at 1270. The court quoted language from Markowitz v. Arizona Parks Board, 146 Ariz. 352, 706
P.2d 364 (1985): “the existence of a duty is not to be confused with details of the standard of
conduct. Duty is found in the relationship between individuals that ‘imposes upon one a legal
obligation for the benefit of the other . . . . Details of conduct . . . have to do with whether the
defendant breached the applicable standard of care, not whether a duty and attendant standard of
care exist’” (citations omitted).
(14) Trupiano at 887.
(15) During the 1985 to 1989 time period, Trupiano met with another agent from Alkema’s agency, SZW.
(16) Trupiano at 888.
(17) Id.
(18) Id.
(19) The Murphy case is also referred to in the body of this article.
(20) Murphy at 373.
(21) Id. at 374.
(22) Peter, headnote [52].
(23) Id. headnote [56].
(24) Zaremba at 155.
(25) Id. at 156
(26) Id. at 157.
(27) Id.
(28)Defendant also raised challenges to the fraud and innocent misrepresentation verdicts, promissory
estoppel, plaintiff’s failure to present expert testimony, and plaintiff’s claims for breach of contract,
recovery of insurance premiums, and penalty interest. Only the negligence issue is addressed in this
article.
(29)Zaremba. at 159. The change in the agent-insured relationship occurs when “(1) the agent
misrepresents the nature or extent of the coverage offered or provided, (2) an ambiguous request
is made that requires clarification, (3) an inquiry is made that may require advice and the agent,
though he need not, gives advice that is inaccurate, or (4) the agent assumes an additional duty by
either by express agreement with or promise to the insured.” (citations omitted)
(30) 461 Mich.1, 597 N.W.2d 47(1999),
(31) Id.
(32) Id. at 160.
(33) McClammy at 158 Wash.App. 774.
(34) Id.at 772.
(35) Id. at 774, quoting Lipscomb v. Farmer’s Ins. Co. of Wash., 142 Wash.App.20, 28, 174 P.3d 1182 (2007).
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(36)The McClammy opinion provides a pithy review of Washington State case law involving the special
relationship; the opinion itself is slightly more than five pages.
(37) Murphy v. Kuhn, 660 N.Y.S.2d 371, 375.
(38)Even when the special relationship is found to exist, the selection of policy limits universally remains
the function of the insured, not the insurance agent or broker. There may be isolated situations
in which the agent or broker has unequivocally agreed to take on this responsibility, but these
instances are the exception. When there is no clear agreement to the contrary, selection of limits is
the policyholder’s responsibility.
(39)Most practitioners assume that the alleged missing coverages and/or higher limits are readily
available, which may not be accurate and should be confirmed.
(40)In many jurisdictions, proof of a producer’s failure to meet his or her legal duty is sufficient to allow
the finder of fact to consider the producer’s culpability in an E&O case. There would be no need for
an expert witness to opine with respect to a producer’s breach of the standard of care. See fn. 13.
(41)See Johnson & Higgins v. Hale, 121 Md.App. 426, 710 A.2d 318 (1998), International Brotherhood of
Teamsters v.Willis Corroon Corporation of Maryland, 369 Md. 724, 802 A.2d 1050 (2002)
(42) The original agency name was E. Churchill Murray, later Murray, Martin & Olsen.
(43) Sadler’s home was valued at over $600,000 and was insured for $231,000.
(44) 139 Md.App. at 374.
(45) Id. at. 374,410.
(46) Id. at 393.
(47) Id. at 394.
(48) 660 N.Y.S.2d at 375.
(49) 57 Cal.App.4th 916, 67 Cal.Rptr.2d 445, 452 (1997).
(50)Agreeing to act as a risk manager would bring the producer within the ambit of the general rule set
out in Fitzpatrick v. Hayes cited on this page, particularly paragraph (c).
(51) Burnham’s Insurance Dictionary, Burnham (2009)
(52)Madelyn Flanagan, Assistant vice president for research, IIAA, quoted in Roquet, Deregulation Could
Put Agents on the Spot, National Underwriter, September 4, 2000.
(53)For an in depth discussion of the effects of these two cases See: Convoluted Court, Leslie Gordon,
ABA Journal, January 2011, p. 16
(54)The insurer estimated the loss to be approximately five percent higher than the policy limits for the
building. The policyholders’ public adjuster calculated that the building was underinsured by more
than one half.
(55)The religious order was located in Maryland and made all decisions with respect to procuring
insurance for a School located in New Orleans. The school was a separate corporate entity, but was
governed by the order’s six member General Council. The Council also functioned as the board of
trustees of the School which had very little input into the selection of insurance coverage and limits.
© 2012 CPCU Society
CPCU eJournal, Vol. 65 No. 6
June 2012
www.cpcusociety.org
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